Comments on: Update on Finances http://ephblog.com/2009/06/15/update-on-finances/?utm_source=rss&utm_medium=rss&utm_campaign=update-on-finances
All Things EphWed, 17 Jun 2009 16:52:38 +0000
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By: frank uible http://ephblog.com/2009/06/15/update-on-finances/#comment-58127
Wed, 17 Jun 2009 16:52:38 +0000http://www.ephblog.com/?p=18159#comment-58127You economists humbly should voluntarily retreat to the far end of the line and from there attempt to meritoriously advance in society but for the nonce starting with shovelling, absent the benefit of Wellies or the like, seas of diarhetic elephant manure without surcease seven days a week.
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By: hwc http://ephblog.com/2009/06/15/update-on-finances/#comment-58124
Wed, 17 Jun 2009 16:24:18 +0000http://www.ephblog.com/?p=18159#comment-58124lgeorge:

Harvard has taken a big hit. In addition to dealing with the same endowment declines as Williams, they have been facing severe liquidity problems due to cash call commitments to private equity funds and a disasterous interest rate blunder by ousted president and current Director of the White House National Economic Council, Larry Summers. He incorrectly predicted the bottom of the interest rate curve several years ago and committed Harvard to a portfolio of interest rate swaps sufficient to cover the development of the Allston campus over the coming decades. As the credit markets collapsed over the past year, these interest rate swaps turned upside down and became huge liabilities, resulting in massive cash calls to bring them into balance. This required Harvard to borrow $1.5 billion for operating expenses after they failed to sell off enough of their private equity stakes to generate cash. that’s an additional $60 million or so in interest expense in the annual budget that must be offset by an additional $60 million in spending cuts elsewhere. Summers had already been run out of town, but his legacy of failed economic prognostication will continue to hurt Harvard for years.

Harvard has an operating budget of $3.5 billion. That should give them plenty of places to shave a bit off here and there. Their endowment is expected to be down about 30% for the year at the end of the month, putting it at 2005 levels. The brand and name recognition will continue to rule, however unjustly and despite any cuts in the quality of their programs (which some wags would have said were already over-valued).

3% real rate of return may be conservative, but a year ago nobody was predicting a 25% to 30% decline in endowment value. We are in a period of economic instability where it is impossible to know what consistutes a conservative projection.

It’s not really an issue today because the endowment spending rates at most colleges for next year are going to be at unsustainable levels, regardless of real return. Almost everyone is going to be eating their seed corn in 2009-2010.

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By: hwc http://ephblog.com/2009/06/15/update-on-finances/#comment-58117
Wed, 17 Jun 2009 15:37:20 +0000http://www.ephblog.com/?p=18159#comment-58117It is neither gratuitous nor snide to mention the inflation that inevitably results from unprecedented deficit spending. An endowment manager would be irresponsible to not factor rising inflation into the forecasts of real return over the next decade.
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By: JeffZ http://ephblog.com/2009/06/15/update-on-finances/#comment-58115
Wed, 17 Jun 2009 15:08:42 +0000http://www.ephblog.com/?p=18159#comment-58115Whitney, have you followed HWC’s posting history? There is zero doubt in my mind that saying “WHEN inflation reaches 10 percent” is a completely gratuitous, not to mention totally off-point, shot at Obama’s fiscal policies — HWC rarely passes up an opportunity (or in this case, invents an opportunity) for a snide comment at Obama’s expense, and this most certainly is intended as such. (Had he siad, “if inflation eventually increases, then that would have an impact as well” I would have let it slide — but that is NOT what he said, for a reason).
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By: Whitney Wilson '90 http://ephblog.com/2009/06/15/update-on-finances/#comment-58113
Wed, 17 Jun 2009 14:50:06 +0000http://www.ephblog.com/?p=18159#comment-58113Jeff,

I hardly see HWC’s comment here as a dig at Obama. I think you are getting a little sensitive here.

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By: JeffZ http://ephblog.com/2009/06/15/update-on-finances/#comment-58112
Wed, 17 Jun 2009 14:45:26 +0000http://www.ephblog.com/?p=18159#comment-58112Nice gratuitous dig at Obama HWC — of course, were HWC’s favorite Hillary the President, she’d most likely have the exact same team of economic advisors and the exact same fiscal policy, the only difference being that HWC prefers policy made by a white woman to that made by a black man.
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By: Vermando '05 http://ephblog.com/2009/06/15/update-on-finances/#comment-58111
Wed, 17 Jun 2009 14:31:44 +0000http://www.ephblog.com/?p=18159#comment-58111Ah, you’re right, many thanks, my mistake. That’s still conservative – I don’t blame the college for thinking it can do better – but it does make much more sense.
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By: hwc http://ephblog.com/2009/06/15/update-on-finances/#comment-58105
Wed, 17 Jun 2009 13:01:15 +0000http://www.ephblog.com/?p=18159#comment-58105Verando. David was referring to the real rate of return. That would be the return after you’ve covered inflation. So, when we return to double digit inflation, you might need nominal returns of at least 13% a year to cover 10% inflation plus earn a 3% real rate of return.
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By: Vermando '05 http://ephblog.com/2009/06/15/update-on-finances/#comment-58094
Wed, 17 Jun 2009 06:21:16 +0000http://www.ephblog.com/?p=18159#comment-58094There are some real curmudgeons here when it comes to estimating the endowment’s future returns. Not saying who is right or wrong, but crimey, who uses 3% when estimating future returns? I’d assume that we could just turn over the entire endowment to David and he could do better than that, or at least I’ll assume that he projects more than that to his clients.
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By: hwc http://ephblog.com/2009/06/15/update-on-finances/#comment-58079
Tue, 16 Jun 2009 20:30:50 +0000http://www.ephblog.com/?p=18159#comment-58079BTW, in scenario in #24 above, the “real growth rate” is assumed to be 4.25% – the amount that can be spent while fully preserving the buying power of the current endowment in perpetuity.

I believe that colleges are re-examining their assumptions about real growth rates and long term investment return. For one thing, they are shell-shocked and justifiably concerned about the disregard for liquidity. It is reasonable to assume that investment strategy is going to become decidedly more conservative. Beyond that, I don’t think endowment managers feel they have sufficient data to model future growth rates at this point.

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By: hwc http://ephblog.com/2009/06/15/update-on-finances/#comment-58077
Tue, 16 Jun 2009 20:13:27 +0000http://www.ephblog.com/?p=18159#comment-58077Colleges like Williams are supposed to preserve the real spending power of the existing endowment in perpetuity, even if all future gifts ended today. That is the definition of an endowment. Conservatively managed colleges never include future endowment gifts in projecting return and spending levels. Future endowment gifts allow growth. The current endowment return is intended to preserve the status quo forever.

One big endowment college has been using a figure of 8.75% for their calcuation of historic return on investment. Of that, an average of 4.5% is reinvested to offset inflation and the remaining 4.25% is spent on operations (on average).

Even if you assume that the 8.75% rate will again become reasonable, you still have to dramatically cut spending to get back down to 4.25% spending from a smaller endowment.

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By: JeffZ http://ephblog.com/2009/06/15/update-on-finances/#comment-58076
Tue, 16 Jun 2009 19:09:37 +0000http://www.ephblog.com/?p=18159#comment-58076I should have said earlier than I know far less about finance than many of the posters here (certainly DK) so it is quite possible I am confused or mistaken on these issues. But I attempted, in my rudimentary way, to calculate the historic rate of return (using an online calculator so who knows if I was even using the correct tool) over the last 30 years to the endowment as it stands now (1.4 billion) which includes the 25-30 percent drop from its peak value of 1.9. I think that figure ends up right around 9.5. I’m not sure why future years should be different (especially when we are ending at a relatively low point), but even if they are, going from 9.5 to 3 seems like a dramatic, dramatic difference. It just seems to me that DK is expecting Williams’ growth to mirror that of the economy as a whole, ignoring the fact that the economy as a whole doesn’t have a slew of rich benefactors eager to give it money on an annual basis. Basically, there is wealth transference, in addition to natural investment growth, that must be considered. I also think we have to consider that Williams’ massive outlays on capital expenditures of late make future such massive outlays far less likely, at least for the next 20-25 years before some of the newer buildings start to require massive upgrades / renovations. Other than the remaining 50 million for the library project and, I’d expect, a far smaller outlay for renovating the athletic complex, I don’t see a lot of capital needs on campus. Compare that, for example, to Amherst which needs to soon embark on massive upgrades to its science, student life, and library facilities, just to catch up to where Williams already is (or soon will be in the case of the library).
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By: hwc http://ephblog.com/2009/06/15/update-on-finances/#comment-58072
Tue, 16 Jun 2009 17:51:13 +0000http://www.ephblog.com/?p=18159#comment-58072There was a call upthread to consider historical returns when attempting to predict future endowment returns. That’s a good suggestion. Along with the boom years, we also need to consider the recent history, which is two consecutive years of negative endowment returns (somewhere in the 25% to 30% range overall. It takes years of growth just to offset that negative return.

Also, keep in mind that endowments require significant growth just to offset inflation. Complicating that is the fact that college budgets are so heavily weighted towards labor. They must use an estimate of inflation plus 1.5% to calculate their anticipated real inflation in operating costs. Conservatively managed colleges have been figuring historical inflation at 3% and real inflation for college budgets at 4.5% per year. Thus, to spend 5% a year from endowment requires average returns on the order of 9.5% annually to not spend down the endowment purchasing power over time.

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By: JeffZ http://ephblog.com/2009/06/15/update-on-finances/#comment-58062
Tue, 16 Jun 2009 16:03:33 +0000http://www.ephblog.com/?p=18159#comment-58062So David, why don’t you then explain why my argument is wrong? Why, according to you, we should not consider either (a) alumni donations or (b) the historic growth rate in anticipating a growth rate for Williams’ endowment above and beyond a natural rate of increase from investment proceeds? I would LOVE to hear this.

Agreed re: post 20.

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By: Larry George http://ephblog.com/2009/06/15/update-on-finances/#comment-58059
Tue, 16 Jun 2009 15:40:20 +0000http://www.ephblog.com/?p=18159#comment-58059Re 17 – RIP, Williamstown Jazz Festival. I am sorry to hear that one has gone. Even though I cn see the financial necessity, I just want to acknowledge and grieve over the loss.
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By: David http://ephblog.com/2009/06/15/update-on-finances/#comment-58044
Tue, 16 Jun 2009 12:53:57 +0000http://www.ephblog.com/?p=18159#comment-58044I do not think that “rebutted” means what you think it means.
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By: jeffz http://ephblog.com/2009/06/15/update-on-finances/#comment-58013
Tue, 16 Jun 2009 02:34:12 +0000http://www.ephblog.com/?p=18159#comment-58013I think I’ve now rebutted DK’s point about three percent growth on at least two occasions, without any rejoinder from DK. As he is never shy to issue one, I take that to mean he won’t be making this fallacious “if we assume more than 3 percent growth then we are assuming Williams will own the world” argument in the future, especially in light of the fact that Williams’ past rate of endowment growth has, in fact, far outstripped that level.
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By: frank uible http://ephblog.com/2009/06/15/update-on-finances/#comment-57990
Mon, 15 Jun 2009 19:42:40 +0000http://www.ephblog.com/?p=18159#comment-57990The College has dropped its patronage of the Williamstown Jazz Festival – which, of course, means the Festival has now folded. This action is in general a cultural loss for the Williamstown community and more specificall the loss of an appearance opportunity for the well put together College Jazz Ensemble.
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By: Parent '12 http://ephblog.com/2009/06/15/update-on-finances/#comment-57969
Mon, 15 Jun 2009 15:48:09 +0000http://www.ephblog.com/?p=18159#comment-57969My comment has nothing to do with finances, but with the length of the semesters vis a vis WSP. (btw, the difference between Amherst’s Fall ’09 semester & Williams is 4 days of classes, counting Mt Day, reading periods, other breaks, like Thanksgiving & finals periods as days off. And, based on the catalog, Williams seems to consider 36 hours/semester as a course or 3 credits.. extra hours in lab-based courses or weekly supplemental conference hours are “extra” without more credit)

I would imagine that even if the trade-off between WSP & the number of class meeting hours occurred, the actual work demanded of the students remained the same. As I recall, there was a time when there might have been grade deflation. Is it possible that this time coincided with the early history of WSP?

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By: lgeorge http://ephblog.com/2009/06/15/update-on-finances/#comment-57966
Mon, 15 Jun 2009 15:21:26 +0000http://www.ephblog.com/?p=18159#comment-57966I won’t argue it further because I don’t want WSP (or certain of my own other sacred cows) to be dropped, but cutting the length of the school year, however it was done (including taking away WSP without “restoring” some or all of the weeks to the calendar; cutting out some of the reading periods; halving spring break; or eliminating some other days off from the calendar) would save money, especially if it were done in a way that added to the number of days in the colder, darker months when the campus was actually shut down (as opposed to there being no classes). Thank you, though, hwc, for pointing out the difference in the length of the semesters vs. those of some other LACs and how WSP was created. I think I knew that once but I had certainly forgotten it.
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By: hwc http://ephblog.com/2009/06/15/update-on-finances/#comment-57962
Mon, 15 Jun 2009 14:50:01 +0000http://www.ephblog.com/?p=18159#comment-57962If we exempt as sacred cows no layoffs, international financial aid, sports teams, and dining halls, I would be very curious to know what is being cut. The size of the required cuts seem to suggest that cuts must be made in academic and student support programs.
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By: JeffZ http://ephblog.com/2009/06/15/update-on-finances/#comment-57961
Mon, 15 Jun 2009 14:48:33 +0000http://www.ephblog.com/?p=18159#comment-57961Actually, at least in Amherst’s case, it seems like Amherst has only one more week each semester, even accounting for the longer in-semester breaks Williams has (September 4 – Dec 15 at Williams, Sept. 8 – Dec 22 at Amherst (but I think Williams has a few extra reading period days built in, making the difference one week), and Feb. 4 – May 25 at Williams, Jan 25 – May 14 at Amherst (although Williams has a two week Spring break making the difference one week). Maybe Amherst also has a week less than its peers, not sure about other schools …
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By: hwc http://ephblog.com/2009/06/15/update-on-finances/#comment-57960
Mon, 15 Jun 2009 14:43:31 +0000http://www.ephblog.com/?p=18159#comment-57960It’s not the same criteria. Williams College has an international financial aid budget and a domestic financial aid budget. The per student financial aid budget for interntionals is roughly double the per student financial aid budget for US citizens. I have no problem with that to the extent that US taxpayers are not funding it with tax-exemptions.

Williams admissions has stated that they could bring international aid more in line with domestic aid, simply by adjusting the schools are areas they target with recruitng outreach — just has they do in the United States to maintain the desired percentage of aid veruse full-fare students. By not doing that, they are treating the two groups differently.

Winter Study doesn’t cost Williams additional money. Instead of 14 weeks of classes per semester like other LACs, Williams reduced the length of each semester by two with only 12 weeks of classes. The four “saved weeks” are used for Winter Study. It’s really just the trade-off between 14% less coverage during the eight courses taken in the fall and spring semesters versus the value of the 9th course taken in January.

Perhaps the only jarring note was Morty making a big distinction between aid for US students and aid for internationals. Is Williams really so parochial as that? There may come a time when we need to cut aid, but we should do so without regard to citizenship. Discriminating against internationals in aid awards makes no more sense today than discriminating against Jews in admissions did 75 years ago.

Right now, Williams is discriminating heavily against US students in favor of international students, both in terms of percentage of students from each group who receive aid and the size of the aid packages. I believe that it is wrong for US colleges to discriminate against US students and that it would be reasonable to reduce the benefit of tax-free status funded by US taxpayers accordingly.